Bought Telefonica (ADR) $TEF:Undervalued Dividend Income Stock?

I initiated a position in Telefonica on Thursday at a price of USD 61.50.

Telefonica, together with its subsidiaries and investees operates in the telecommunications, media and contact center industries. Telefonica basic purpose is the provision of all manner of public or private telecommunications services, including ancillary or complementary telecommunications services or related services.

The Company operates in three business areas: Telefonica Spain, Telefonica Latin America and Telefonica Europe

Essentially Telefonica is the third largest telecommunications company in the world behind AT&T and Vodafone.

Withholding Taxes on dividends

The size of the position is not big.

My main intention is to see how the dividend payments gets affected by withholding taxes. Particularly, it may get quite complex for a Singaporean holding a Foreign ADR on the US Stock exchange.

The main question is will I get double taxed (First by a 20-25% withholding tax from Spain for a US ADR then secondly a 30% withholding tax from US as a alien to USA)

I am using DBS Vickers so dividend handling charges is nil.

The end result is that my dividend yield could be really small. The current div yield listed at USD 62 is 8%.

A 30% US withholding tax will bring the current yield to 5.6%. If there is another withholding tax from Spain it could be much lesser.

Telefonica as a dividend stock

I gain a lot of insight into mobile communications and fixed line communications and the impact of 3G and LTE via Telco 2.0.

The coming wave changes the business economics of telcos particularly those heavy on mobile communications.

The end result is that in the developed markets, the telcos will find it difficult to increase their revenues or ARPU (average revenue per user) and that their cost on infrastructure will increase due to high data usage caused by all-you-can-eat unlimited data plans. [Read manifesto to find out more >]

Large Company

The size of the company for me gives it a competitive advantage going forward. We saw how M1 Limited and Starhub struggled against the incumbent Singtel.

The incumbent is able to seriously spread the cost of marketing, capital expenditure, something the smaller telcos cannot do. They are able to undercut their competitors and eliminate switching cost better due to their larger capital base.

They are also able to partner popular handset manufacturers. Their sheer size enables them to have some buyer’s power over their suppliers.

Global subscriber base

Although their stock was affected badly as they generate earnings in Euros, less than 50% of their revenue comes from Spain.

EV/EBITDA

In terms of fundamentals Telefonica current trades at an EV/EBITDA of 9 times operating cashflow.

That is quite high compared to the rest of the european telcos but not the highest.

Dividends Sustainability

Fundamentally, it paid out 4.8 billion in dividends in 2009. Free Cashflow have been relatively maintained at 8.8 billion. This means that essentially it has the capability of paying out much more than 4.8 billion in dividends and still do not need to tap the debt market.

The management intends to hike the dividend payout further. Dividend payout have increase from 3.1 billion in 2006 to 4.8 billion in 2009.

If you checked my google spreadsheet you will realise that dividend payout have increase but free cashflow, operating cashflow and net income have not.

This likely means that dividend payout ratio have been increasing but not the earnings which have been stagnating. In my opinion this might not be a good sign.

Technicals

Telefonica is in a downtrend. Prices are closer to the 52 week low rather than the 52 week high. Clear signs of it making lower highs and deeper lows.

Price broke a resistance form by the lower peaks but prices are still far away from the 200day moving average.

In terms of price factoring in fundamentals and technicals, it offers a good place to build a position.

I will only add more if the fundamentals and the price moves higher. I know we should buy things cheap but I am basing a lot on technicals here. A move up towards 65 only for it to fail and make a lower low towards 55 is a clear sign of Telefonica continuing its downtrend.

Telefonica after so much negativity have the potential to stage a turnaround and move up above the 200day moving average and stayed above.

If it doesn’t I am likely to sit around if it stays above 55. .

I run a free Singapore Dividend Stock Tracker available for everyone’s perusal. It contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly here.

as you might already know with VOD i get exposure to India and north america ,with TEF exposure to south america and i would like to add more companies that cover Asia and mainly exposure to china but i dont like companies run by governments so that will leave out china mob.

hi sentosa, yes i heard about it. its a humbling lesson how badly the cash flow can go down to. as such, telefonica have to suspend dividend so that they can probably reduce the debts. are you invested in this?

hi Cheng Cheok, are you the creater of jstock? if yes than a big shout out to you haha!

I have not looked into Santander for a long time, and for me banks are the hardest to see the cash flow since their products are so hard to understand, and we do not know if they have much counterparty risk.

Still i have an acquaintance who also like the yield and got invested last week. This looks like a distress play. but than it looks enticing 2 years ago so it can still go down further.

Banking itself is a complicated business. Warren Buffett even claim himself he didn’t understand every aspects of his Well Fargo. However, if it is well managed, it tends to be very profitable.

If we track back to history, Malaysia’s good banks (Maybank, Public Bank) tend to provide a very good return throughout the year. They are kind of stocks that if you invested 1k 30 years ago, it tends to become more than 100k till today. I tried myself by investing in Malaysia good banks >5 years. They tend to produce good returns.

Since Malaysia stock market is all-time high right now, I want to tap for cheaper bank stocks in Europe area. 2 banks fit into my radar scan

– HSBC – Santander

Both banks come with strong brand name, and reasonable / exceptional dividend yield (4% and 10%) respectively. HSBC is a less worried bank, as it has strong presence in Asia.

Santander is a more worried bank, as it is a spanish bank. But, the facts that, its >50% profit generators are located in South America, and 10% dividend yield, are both irresistible factors to invest in it. Currently, its last 2 quarters don’t turn out well. As, it used almost all the generated profit as provision for bad loan. I expect its quarterly result will back to normal soon. According to them, 90% of bad loan is covered. Still left over 10%.

So, unless they have something to hide under carpet, I see this bank as kind of, “buy now, worry now and happy later” 🙂

you caused me a lot of grief because had jstock handled dividends much better i would have used it instead of coming up with my stock portfolio tracker haha.

i guess the Malaysian banks must have make you very well off. the problem with banks compare to other business is that you do not know what is under their carpet.

When i look at Telefonica i thought based on the business model there is little to be worried about. when the shit hits, it occur to me even though revenue isn’t derive majority from Europe they will get affected as well.

Good tip on HSBC and Santander, i will take a look. i take it you are heavy on Malaysia shares, any good stocks to watch out for?